Card Giants to Pay $6 Billion

Visa, MasterCard Agree to Settlement That Allows Retailer Surcharges for Paying With Plastic

By

Robin Sidel and

Andrew R. Johnson

Updated July 14, 2012 12:51 a.m. ET

Visa Inc.,V-1.36%MasterCard Inc.MA-1.03% and some large banks agreed to pay scores of retailers—from giant Publix Supermarkets Inc. to an interior-design store in Minnesota—more than $6 billion to settle a long-running lawsuit, in a pact that also permits merchants to charge more to customers who pay with credit cards.

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The settlement is a victory for retailers, which will get more control over how people pay, and removes a legal threat for the major card companies.

It could potentially raise prices for some goods and services for consumers who prefer using cards to cash and checks.

The agreement, reached after months of negotiations, calls for Visa and MasterCard to cut for eight months the fees that merchants pay to accept credit cards.

The merchants valued the fee relief at $1.2 billion in addition to the $6 billion settlement, according to Robins, Kaplan, Miller & Ciresi LLP, one of the law firms representing merchants. The cash portion is to settle merchants' claims of price-fixing.

ENLARGE

Visa and MasterCard have already set aside most of the funds to pay for the cost of a settlement.
Bloomberg News

Visa and MasterCard have already set aside most of the funds to pay for the cost of a settlement. Visa and MasterCard entered a sharing agreement last year that makes Visa responsible for about 67% of any settlement and MasterCard for 33%.

The banks will help fund MasterCard's portion, leaving MasterCard with a responsibility of 12% of the settlement.

"Although we have strong defenses to all claims, a settlement avoids years of litigation and uncertainties that are inherent in such cases," said Noah Hanft, MasterCard's general counsel, in a statement.

K. Craig Wildfang, a partner at the Robins Kaplan plaintiff firm in Minneapolis, said, "The reforms achieved by this case and in this settlement will help shift the competitive balance from one formerly dominated by the banks which controlled the card networks to the side of merchants and consumers."

The battle dates to 2005, when large retailers, including Kroger Co., Safeway Inc. and Walgreen Co., began filing price-fixing lawsuits against Visa and MasterCard.

Visa and MasterCard rules have long prohibited merchants from charging customers more for credit-card transactions.

In a peculiar twist, the rules permit merchants to offer discounts to customers who pay with cash. Few of them actually do so, however, with the exception of some gas stations.

The pact doesn't apply to debit cards, which have grown in popularity for small-value transactions.

Besides the large retailers' litigation, other merchants filed their own suits, including small-business owners such as doctors and bakeries. More than 50 suits were ultimately consolidated in U.S. District Court in Brooklyn.

The card companies also reached agreements with other merchants that weren't part of the class action.

The ability to charge more for credit cards is likely to set up a tricky dance for merchants, which may risk angering customers if they start charging more for such transactions.

"I am hoping surcharging becomes commonplace, but small firms will not lead the charge," says Mike Schumann, owner of Traditions Classic Home Furnishings in Minneapolis, which was a plaintiff in the case.

He said he might add a surcharge for plastic of 2.5% to 3% if his competitors adopt the practice.

The settlement calls for merchants to advise consumers of the surcharges, potentially at the cash register. It also includes some restrictions on the extra amount they can charge.

Merchants have complained bitterly about Visa and MasterCard's rising costs of accepting plastic, particularly as a growing number of U.S. consumers use credit cards and debit cards for purchases. Americans have been making more purchases with plastic than cash and checks since 2003.

Merchants pay roughly $25 billion each year to card-issuing banks in so-called interchange fees, which are levied on each transaction made with plastic.

The amount of the fees, which are set by Visa and MasterCard, varies greatly depending on the type of merchant and the type of card used.

Card companies defend those fees, saying merchants receive a big benefit from accepting plastic. Among other things, people typically spend more when they pay with plastic instead of cash and checks.

The case doesn't involve American Express Co. or Discover Financial Services Inc., which are also big card networks.

The lawsuit settlement says that merchants can't discriminate among card brands if they decide to add surcharges.

The settlement represents the second recent big interchange victory for merchants. The Dodd-Frank financial overhaul law that was adopted two year ago included a measure that cut in half the interchange fees on debit cards.

Not everyone was happy with the outcome of the retailers' litigation. The National Association of Convenience Stores, which was one of the plaintiffs in the case, rejected the proposed settlement.

The trade group said that the settlement failed "to introduce competition and transparency into a clearly broken market."

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